Misclassifications of Independent Contractor and Employees: Does Your Business Have It Correct?

Misclassifications of Independent Contractor and Employees: Does Your Business Have It Correct?

There are three principal factors in determining whether a certain employee is an independent contractor or a common law employee. These factors include the amount of control the company has over the employee’s tasks, the financial control the company has over the employee, and the general relationship between the company and the employee.

The main difference between an employee and an independent contractor is the amount of control a company has over the individual’s tasks. If the company has complete control over the individual’s tasks, that individual is generally considered an employee. If the company does not have any control over the employee’s tasks, that individual is considered an independent contractor, whose orders come directly from the corporation they work for.

The amount of financial control the company has over the employee also determines whether or not the individual is an employee or an independent contractor. An employee has a direct financial relationship with the company in which the employee is directly paid by the company and reimbursed for all business expenses. On the other hand, the independent contractor has an indirect relationship to the company. The independent contractor is paid through their corporation (ex. Company pays independent contractor’s corporation and that corporation then pays its employee, who is the independent contractor.). The company has no legal relationship with the independent contractor.

Additional factors that should be considered when identifying someone as an independent contractor may include:

If the worker supplies his or her own equipment, materials and tools;

If the worker can be discharged at any time, and can choose whether or not to come to work without fear of losing employment;

If the worker controls the hours of employment thus indicating they are acting as an independent contractor; and

Whether the work is temporary or permanent.

Again, the nature of the work will help define the relationship. When work is considered integral to the business, it is more likely that the person is an employee. On the other hand, work that is temporary and not integral may imply independent contractor status.

Another simple way to determine whether or not a certain individual is an employee or an independent contractor is the general relationship between the individual and the company. Individuals such as doctors, lawyers, accountants, etc. who offer their services to the general public are usually independent contractors, whereas employees that have an employee-employer relationship are usually employees. An independent contractor receives benefits and protections from their own corporation, whereas an employee receives benefits and protections from its employer. A company may not withhold taxes from an independent contractor; the independent contractor’s corporation handles that. A company can, however, withhold taxes from its employee. The relationship between a company and an independent contractor is indirect, whereas the relationship between a company and an employee is direct.

Notice that in the analysis of the above, it does not matter what you the employer “title” or “classify” the worker as it is what they truly are based upon the analysis of the above factors. This case-by-case analysis and this is why so many businesses get it wrong. All it takes is for an independent contractor to file for unemployment and then your business can be exposed for a misclassification. A practice tip is to make sure your independent contractor relationship is in writing.

If you would like an evaluation of whether your employees and independent contractors are properly classified, please contact Meglino Law at 407-900-7440.